The Hidden Costs of Bankruptcy Reform

ByRobert M. Lawless. Robert Lawless is an associate professor of law at the University of Missouri at Columbia.July 1, 1993

CONSUMERS and small businesses will be worse off if Congress passes a bankruptcy reform bill pending before the Senate. Large banks, credit-card companies, and other special interests would be the big winners. While the bill contains meaningful reforms, it is also rife with the work of these special interests.

A similar bill passed the Senate last year, 97 to 0, and died in the House only by expiration of the legislative calendar. But this new bill is expected to be enacted into law. If the Bankruptcy Amendments Act of 1993 passes:

* Credit-card companies will find it easier to force consumers to pay bills after bankruptcy proceedings.

* Lenders to a bankrupt airline who have taken the airline's planes as collateral would be entitled to special treatment. This favored status would come at the expense of the airline's employees and customers.

* Owners of equipment leased to a bankrupt business could be entitled to payment regardless of whether the equipment was used, harming small businesses.

* Large banks could receive payment for services to a company's bondholders ahead of its wage-earners.

* It will be easier to force the sale of family heirlooms as part of bankruptcy proceedings.

In addition, the bill proposes creation of yet another government entity: the National Bankruptcy Review Commission, which would cost taxpayers $1.5 million.

How can all this happen under the supposedly watchful eye of a free press? What happened to the elimination of special-interest legislation? This was Ross Perot's campaign theme; Bill Clinton made similar promises.

The current bankruptcy bill demonstrates why these problems are innate in our political system. All the promises and all the complaints about special interests will not make special-interest legislation go away. The financial industry can raise big dollars for the re-election campaigns of key members of Congress.

However, the American public stands on the other side of this equation. Our interests are diverse. The costs of this special-interest ``reform'' will be distributed to the public. We will pay higher prices to make up for the huge benefits the financial industry will reap.

Few among us worry about bankruptcy reform. Yet, like many areas not receiving due attention, the bankruptcy system has a staggering effect on the economy. Last year, more than 900,000 individuals and 70,000 businesses filed for protection under US bankruptcy laws. Next year, at least $587 million will be spent administering the federal bankruptcy system.

These lesser-known bills are enacted into law without scrutiny in the crucible of public opinion. The Bankruptcy Amendments Act of 1993 is only one such law.

Bankruptcy-reform monitors lack the political clout to force change. They have no political constituency or PAC money to deliver votes for members of Congress.

The bankruptcy bill likely will pass. The bankruptcy system will adjust. Life will go on. But, we are deluding ourselves if we believe that special interests will fade quickly and quietly from the political scene.